Inheriting a house can be exciting, but if it has a mortgage on it, you have certain steps you must take. You’ll need to know the fine print on the mortgage in order to determine what you must do. Some mortgages require the immediate sale of the home and repayment of the mortgage, while a few others may allow you to assume the mortgage, should you desire to do so.
Selling the Home
Many mortgages have a ‘due on sale’ clause. This clause pertains to many situations, including when the owner dies. If the property passes hands, the mortgage becomes due and payable almost immediately. This allows the lender to demand full payment right away.
However, the Garn-St. Germain Depository Institutions Act of 1982 allows an exception to this rule. If the home transfers to any of the following beneficiaries, the due on sale clause does not apply:
- Joint tenant
- Tenant by the entirety
- Family member (in a will)
This mostly pertains to spouses that live in the house currently, but are not on the mortgage. Prior to the Act, even spouses had to leave his or her home upon the death of his or her spouse. If the deceased left the home to someone other than a joint tenant or tenant by entirety, the lender can enforce the due on sale clause.
The executor or trustee of the property must continue to make payments on the mortgage while everything gets worked out. This could take months, which puts quite the responsibility on the person in charge. Because it takes time to transfer property whether through probate or other channels, those that inherit the property may have to make payments on the mortgage for several months before being able to do anything with the home.
Lenders call this assuming payments. You take on the loan under the same terms that the owner had. You don’t have to refinance the loan into your own name or qualify for it. Instead, you make the payments just as the owner did and the lender will leave the home alone.
Following the Direction of the Will or Trust
The ideal situation occurs when the owner of the home directs how to handle the home. For example, he can direct you (in the will) to liquidate certain assets to pay off the home loan. Once you pay the loan off, you own the home without the bank’s input and can do with it what you please, as long as you are the legal owner after transfer. At this point, you can keep the home or sell it, acting according to the deceased’s last will and testament.
Selling the Home
If you just can’t afford the home and want to sell it, you have that option too. While you are still under obligation to make the mortgage payments while you try to sell the home, if you can’t contact the lender. You may be able to work out a short sale deal with the lender. In a short sale agreement, the lender doesn’t start foreclosure proceedings and the lender agrees to a lesser amount for the mortgage than what the home is worth.
You must work in conjunction with the other beneficiaries on the property, though. If the home has equity in it and there are other beneficiaries on the property, you must protect the equity to the best of your ability. Not making the payments could land the home in foreclosure, which could affect all beneficiaries on the property.
If possible, have a conversation with the person that makes you the executor or beneficiary of his or her will. Know the intentions he or she has with the home and what options you have. Talk about the financial responsibility the home will put on you and decide if it’s something that you can afford. Letting a home go to foreclosure leaves everyone with a loss of his or her inheritance. Knowing upfront what this can do may help the person writing the will or trust make the decisions that will positively affect everyone involved.